Opinion
Grain markets headed into the Easter holiday weekend on a bit more volatility, helping most futures stay in the green. Oats were the big winner, rebounding up 4.15% since last Friday, closely followed by 3.5% and 3.15% by soymeal and corn respectively.
The U.S. dollar was the big loser of the week, down 0.6%, which supported grain markets (as mentioned), including wheat up 1.25% and soybeans up 1.6% in the past week. If it wasn’t for a WASDE report from the USDA, you’d think the world is on the hunt for grain.
Why would I say that? There’s still a fair amount of grain available globally. As per the aforementioned report, global carryout for the three major row crops expanded their records further as corn inventories were increased to end the 2016/17 marketing year at 223 million tonnes (+5.3% year-over-year), wheat stocks were raised to 252.3 million tonnes (+4.4 YoY), and the soybeans carryout came in 3.5 million tonnes above expectations at 87.4 million (and +13% YoY).
The bearish supply rhetoric is being battled by bullish headlines of “it’s too wet.” About 2.5 million acres in Argentina have been hit by heavy rains in the last two weeks and while harvest is a bit behind schedule, the Buenos Aires Grain Exchange thinks it’s still early and the corn crop has the potential to average 140 bu/ac and 53.8 bu/ac for soybeans.
In North America, rain has stalled planting progress but is considered generally good for soil moisture conditions, and is perking up the bulls’ attention to help rally things in corn. More specifically, Stewart-Peterson thinks that corn could enjoy a nice spring/summer rally above US$4/bu on the futures board based on the reduction in U.S. corn acres and if poorer weather drops yields below trendline of 170. Some analysts have similar thoughts for spring wheat market as wetness in Western Canada and parts of North Dakota have them optimistic we’ll see bit of pick-up ahead of drills hitting the fields.
Digging into the South American side of the report, the USDA raised soybean production in Brazil and Argentina by a combined 3.5 million tonnes from the March report to a record 167 million tonnes. Specifically, Argentina’s bean crop was expanded by 500,000 MT from the March forecast to 56 million tonnes, while Brazil’s crop was raised 3 million to 111 million tonnes (a record), which surpasses CONAB’s revised estimate of 110.2 million tonnes!
On the corn front, the Brazilian crop was raised by 2 million to 93.5 million tonnes (CONAB raised its call to 91.5) while Argentina was pushed up by 1 million to 38.5 million tonnes. Corn exports between the two countries was raised by 1.5 million tonnes to a combined 58 million tonnes, whereas U.S. corn exports were left unchanged at 56.5 million tonnes. Argentinian soybean exports were left unchanged at 9 million tonnes but soymeal and oil exports fell by a combined 500,000 MT to 32 million and 5.55 million tonnes respectively. In Brazil, soybean exports were bumped up nearly 1 million to 61.9 million, making it the clear #1 exporter of the oilseed (America is No. 2 at 55.1 million tonnes).
Brazilian farmers are apparently “hoping for a miracle” as they are holding back on further soybean sales. Domestic prices (in Brazilian reals) are down about 30% from last June’s record highs, so farmers across the country are hoping for a North American-weather driven rally, despite indications that prices in their country are likely to keep pulling back. AgRural is estimating that just 49% of the Brazilian crop has been sold by farmers (the lowest since 2009/10 and well below that five-year average of 63%) while farmers in southern states are only at 27% sold!
As per consultancy firm Celeres, holding onto the crop and waiting for the rally has paid off for Brazilian farmers four times since 2009/10, compared to one “tie” (unchanged prices) and two losses (prices went down). However, they aren’t expecting it to be a winning strategy this year because the cost of storage this year for most farmers (AKA those who don’t own enough storage) will eat into any gains made from a rally.
A similar train of thought could be applied any grains coming off this spring – it’s not worth holding onto things as there’s plenty of supply out there and instead of waiting to find a deal, clear the bin space and move on to focusing on the 2017/18 crop. Case in point, Ag Value Brokers suggest that in the past decade, feed barley prices delivered into Lethbridge, AB have dropped an average of $13 CAD / MT from June 15 – August 15. Is it worth waiting?
Coming back to the April WASDE report, in the U.S., 2016/17 carryout was unchanged at 2.32 billion bushels (nearly matching market expectations but still 34% higher year-over-year) as ethanol use was expanded by 50 million bushels but feed demand dropped by the same amount, keeping things even. American soybean ending stocks for this year were raised by 20 million from last month to 445 million bushels, which was near trade expectations and is up 126% from 2015/16’s year end. On wheat, ending stocks came in higher than last month and above expectations at 1.16 billion bushels (+19% YoY), mainly because feed use was dropped by 35 million bushels.
Where feed demand is remaining strong is China, as their soybean imports were raised by the USDA by 1 million to 88 million tonnes for 2016/17 as an expanding livestock industry continues to want soymeal. However, soybean oil values on the Dalian Commodity Exchange in China have fallen 15% in the past 2.5 months, due to higher vegetable oil imports and consistent state rapeseed oil reserve auctions.
Looking deeper, Chinese soybean crush margins peaked in December and, in the past few weeks, have gone into negative territory. Worth mentioning as well is that since palm oil owns more than 70% of Chinese edible oil imports (~5 million tonnes/year) and palm oil prices are falling as production is rebounding from two years of El Nino issues. While demand for soybeans should remain strong because of soymeal needs by the exploding livestock industry, there’s a shared bearish sentiment across the edible oils industry in China, which in turn means Chinese canola oil demand is likely to find some challenges as well.
Overall, the bulls are trying to keep things interesting, pounding the “wet” sentiment as much as possible, which is helping rally markets. On April 21st we’ll get the StatsCan seeding intentions estimates and May 10th will bring the first forecasts of the 2017/18 crop year from the USDA, but until then it’s going to be all about the weather. There’s always some challenges to getting the next crop out of the ground, it’s just a matter of how much the speculators want to hunt for and take a shot at said challenges.
Have a Happy Easter!
